Added to the Known Issues: C/C++ section of the NetBeans IDE 7.0 Beta 2 Release Notes as follows:
Issue #193740: On Windows platform, the "Use external terminal" warning displays when the Standard Output console is used for debugging.
Description: The Standard Output console type is not used for debugging on Windows platform.
Workaround: Use the Internal Terminal in the CYGWIN environment and the External Terminal in the MSYS environment instead.